Sentiment may suffer but real economy safe: Evans

The federal budget, which is expected to include the biggest fiscal contraction in nearly 40 years, should have a minimal impact on monetary policy setting, Westpac chief economist
Bill Evans
says.

With Treasurer
Wayne Swan
promising a surplus in 2012-13, tonight’s budget is expected to detail savings and spending cuts of around $43 billion.

It comes at a difficult time for market sentiment, with the S&P/ASX 200 Index suffering its biggest one-day fall for 2012 on Monday.

But if the early leaks are any indication, Evans says there should be minimal impact on the real economy.

“If you look at the change in the stance of policy, going from a deficit of 2.8 per cent of gross domestic product to a surplus, that’s nearly a 3 per cent turnaround," he says.

“That doesn’t mean they’ll take that much out of growth because there are many aspects to the policy change that won’t impact on spending. If they’re cutting back on defence spending . . . that doesn’t affect growth in Australia."

Evans estimates the net constraint on economic growth will be around 1 per cent of GDP, but he thinks that a forecast growth rate of 3.25 per cent next year would still be achievable.

“When the government makes its growth forecasts, it takes into account the market pricing for interest rates. The market is currently forecasting a 0.75 percentage point rate cut [by year end], so that we think will be enough to restore growth to that 3.25 per cent which the government has in mind."